Managers

Additional Insights

Investment Results
Davis Real Estate Fund’s Class A shares provided
a total return on net asset value for the year-to-date
period ended June 30, 2019 of 18.6%.1 Over
the same time period the Wilshire U.S. Real Estate
Securities Index returned 17.9%. Over the most
recent one, five and ten year periods, a $10,000
investment in Davis Real Estate Fund grew to
$11,058, $15,118 and $37,210, respectively.1

The average annual total returns for Davis Real Estate Fund’s Class A shares for periods ending June 30,
2019, including a maximum 4.75% sales charge, are: 1 year, 5.32%; 5 years, 7.57%; and 10 years, 13.48%.The performance presented represents past performance and is not a guarantee of future results. Total
return assumes reinvestment of dividends and capital gain distributions. Investment return and principal value
will vary so that, when redeemed, an investor’s shares may be worth more or less than their original cost. The
total annual operating expense ratio for Class A shares as of the most recent prospectus was 0.97%. The total
annual operating expense ratio may vary in future years. Returns and expenses for other classes of shares will
vary. Current performance may be higher or lower than the performance quoted. For most recent month-end
performance, click here or call 800-279-0279.

This report includes candid statements and observations regarding investment strategies, individual securities, and economic and market conditions;
however, there is no guarantee that these statements, opinions or forecasts will prove to be correct. Equity markets are volatile and an investor may
lose money. Past performance is not a guarantee of future results.1 As of 6/30/19. Class A shares without a sales charge.

Investment Overview

The Davis Real Estate Fund performed well over
the first half of 2019. This has come not as a result
of considerable Fund action, but from continued
performance by those investments that have
buoyed the Fund for the past few years. In fact,
year-to-date turnover is one of the lowest first-half
figures in the Fund’s history. However, even though
we have actively chosen to allow the Fund to carry
on without significant changes, there are some
refinements we have made in the first six months of
the year.

The industrial sector is one that we have long
believed to be in the midst of secular change that
has driven, and will continue to drive, very strong
space demand. E-commerce is often pointed to as
the primary reason, and we think that is the case.
Problematically, high valuations have followed for
almost all publicly-traded industrial real estate
companies. At the moment anticipated growth
supports these rich valuations, but we believe the
market will become more discerning over the next
couple of years.

Any dearly priced stock needs to have something
to keep investors interested. For us that is expected
owner earnings growth. The industrial property
companies we watch should deliver impressive owner
earnings growth over the next few years. Not only is
demand strong for newly delivered developments,
but core growth stands to benefit from strong mark-to-
market rental growth. Where our research yields
differently, however, is our focus on the specific
location of the properties. Big industrial sheds matter
and are necessary components of any logistics chain.
Logistics demand is still strong, which is good for
companies like Prologis (PLD), but higher demand
is found in smaller industrial properties located in
densely populated areas. These areas are the ones
most sought by e-commerce companies looking
for last-touch delivery fulfillment. As a result, the
Fund has concentrated its industrial investments
in Rexford Industrial Realty (REXR) and Terreno
Realty Corporation (TRNO), both of which are well-positioned
to deal with last-touch demand. They
have contributed significantly to Fund performance
over the past couple of years, and even though
valuations have risen, we believe future growth
should more than offset the higher returns that
these valuations demand, and that this growth will
actually bring down multiples for both firms to less
than industry averages over the next few years.

Industrial is not the only sector where we have
refined our investment focus. Retail is commonly
considered the loser in an expanding e-commerce
world. However, not all of it is destined for the waste
container of commercial real estate. Sure, far-flung
enclosed malls in secondary or tertiary locations are
likely to become much less profitable or potentially
worthless, but that will far less likely be the case for
retail property in dense urban and suburban areas
where such properties serve as gathering places.
Unless we are willing to underwrite a world where
people do not engage in social activity, there is no
reason to avoid all retail space. That is the basis
upon which we have refined our approach to the
retail sector.

The Fund has taken select positions in retail real
estate companies with exceptionally well-located
properties that cater to experiential tenants and
internet resistant retailers, and locations that can
be expanded into multiple uses. Acadia Realty
Trust (AKR) is a great example. Most of its assets
are located in dense, highly affluent urban areas.
To throw Acadia out with all other shopping center
REITs is to underestimate the desire of people to live,
work and play in the same area. Shopping center
tenants do not really need the hinterlands nearly as
much in an e-commerce world, but they want to be
in Acadia’s properties for the simple reason that they
are located in prime locations like The Magnificent
Mile in Chicago and Soho in Manhattan. The point
is that not all retail real estate is dying; it is evolving
and, unfortunately for most property owners,
the evolution is all about location. The Fund has
benefited from its ownership in Acadia year-to-date,
and we believe the market is only just beginning to
appreciate how strongly positioned Acadia’s assets
are in the new retail real estate landscape.

We have also made other attempts to take advantage
of the rout in retail stocks, in particular initiating a
small position in STORE Capital Corporation (STOR),
a net-lease REIT. Until this year, the Fund had not
invested in net-lease real estate in any meaningful
way since 2007, when Spirit Finance Corporation
was taken private. We are not intrigued with a
sector whose primary means of growing earnings
is simply getting bigger. Times are good and stock
value is high when capital is plentiful, but stock
becomes little more than a bond when capital is
hard to source. What makes STORE different is
the composition of its tenancy. You will not find in its
rent roll any of the sorts of retailers closing stores
today. Rather, you will find necessity-based and
entertainment-based tenants that we believe to be
internet resistant. Further, STORE has over 2,300
properties in its portfolio and over 400 tenants
responsible for rent payment on those locations.
Said differently, the portfolio is massively diversified
with over 80% of tenants paying less than 1% in rent
and the top tenant paying less than 3%. The failure
of one or even several locations simply would not
matter much, which translates into a net-lease REIT
with core growth that is more durable than most.
When married to a conservatively managed balance
sheet, a sector-leading payout ratio and a top-flight
management team, you have the potential for the
makings of a great long-term investment.

Fund Positioning

We have always approached investing with a value
mindset. In the world of real estate this means an
inexorable focus on dividend growth. For almost
all public real estate companies, that has been a
default condition, at least for those that survived
the great credit crisis of 2007–2008. After all,
the past decade has been blessed with strong
property fundamentals, very low interest rates and,
thankfully, disciplined lending. As we contemplate
the next several years, there are some factors we
think deserve special attention because dividend
growth might become a bit more elusive.

Underwriting any investment requires thoughtful
attention to what sustains growth over long periods,
which in turn helps drive consistent dividend growth.
For decades our assumptions have been based on
the assessment of durable same-store growth. It
is usually a straightforward exercise, but there are
times when the calculus fails. We are particularly
concerned that populist movements in certain areas
of the country could structurally change our assumption
of long-term growth in the apartment sector.

The Fund is currently tracking over a dozen rent
control bills that seek to regulate rent growth or alter
how vacancy can be managed at for-rent properties
in California, New York, Oregon and Washington.
It should not be missed that certain cities in those
states have been responsible for stellar earnings
growth at some of our favorite apartment investments,
including AvalonBay Communities (AVB)
and Essex Property Trust (ESS) among others. The
likelihood that rent control passes is guesswork at
best, but it’s fair to say the probability is not zero.
Likewise, should any or all of these bills be approved,
we do not know the form they will take. We simply
cannot ignore that rent control could meaningfully
slow same-store growth. Our response is to evaluate
all possible outcomes, which means calculating
a range of fair value in a world with no rent control
as well as one in which rent control exists. On
the latter, we have factored measures from mild
to onerous into our analysis. Ultimately, we end
up with adjustments to our estimates of terminal
growth, which is the single most influential variable
in the Fund’s financial models. For now, we feel our
investment in the apartment sector is justified and
underpinned by reasonable valuation even if rent
control measures pass. And if these measures fail,
we believe AvalonBay and Essex will end up trading
at a considerable discount to fair value.

As mentioned earlier, the Fund has taken a somewhat
contrarian view toward retail real estate.
But ours is not a cavalier approach that assumes
anything trading at a discount is worth considering.
Just because something is cheap does not make it a
good value. Rather, we think commercial real estate
value is driven by the old adage, “location, location,
location.” Retail properties that survive and thrive
should be those located in areas with growing
populations, proximity to transportation nodes,
and those that lend themselves to multiple uses.
Federal Realty Investment Trust (FRT), like Acadia,
exemplifies a business with just such an opportunity
set. This shopping center REIT is blessed with great
locations and has proven masterful at transforming
its properties to meet a changing retailer landscape
and recognizing the need to pursue new uses to
maximize value. For example, one of Federal Realty’s
properties, Santana Row, located in the heart of
San Jose, California, was originally contemplated as
a predominately retail property back in 2001. Today
it comprises 50 shops, 30 restaurants, 10 spas and
salons, 615 rental homes, over 690,000 square feet
of office space, a boutique hotel and a movie theater.
Santana Row is the quintessential live-work-play
development, and there is more to come as final
build-out is slated for 2022. While not every asset
in Federal Realty’s portfolio is so endowed, most
offer very attractive use expansion opportunities. As
investors you should understand that our investment
in retail is driven by a focus on these sorts of assets.
Even though we are value investors, growth is
necessary to make a value investment great. We
trust the market will eventually recognize that some
retail is well-suited to a world driven by e-commerce.

More broadly, as fellow shareholders in the Fund, we
continue to execute the Davis Investment Discipline
by investing in real estate businesses best able to
generate free cash flow growth, whatever the sector.
We research companies on an individual basis and
invest in great businesses purchased at value prices
that consistently grow earnings, and dividends, year
after year. Looking forward to the second half of
2019 and beyond, we thank you for your continued
confidence and trust.

This report is authorized for use by existing shareholders. A current Davis
Real Estate Fund prospectus must accompany or precede this material if it is
distributed to prospective shareholders. You should carefully consider the Fund’s
investment objective, risks, charges, and expenses before investing. Read the
prospectus carefully before you invest or send money.

This report includes candid statements and observations regarding investment
strategies, individual securities, and economic and market conditions;
however, there is no guarantee that these statements, opinions or forecasts
will prove to be correct. These comments may also include the expression
of opinions that are speculative in nature and should not be relied on as
statements of fact.

Objective and Risks. Davis Real Estate Fund’s investment objective is
total return through a combination of growth and income. There can
be no assurance that the Fund will achieve its objective. Under normal
circumstances the Fund invests at least 80% of its net assets, plus any
borrowing for investment purposes, in companies principally engaged
in the real estate industry. Some important risks of an investment in
the Fund are: common stock risk: an adverse event may have a negative
impact on a company and could result in a decline in the price of its
common stock; fees and expenses risk: the Fund may not earn enough
through income and capital appreciation to offset the operating expenses
of the Fund; headline risk: the Fund may invest in a company when the
company becomes the center of controversy. The company’s stock may
never recover or may become worthless; large-capitalization companies
risk: companies with $10 billion or more in market capitalization generally
experience slower rates of growth in earnings per share than do mid- and
small-capitalization companies; manager risk: poor security selection may
cause the Fund to underperform relevant benchmarks; mid- and small-capitalization
companies risk: companies with less than $10 billion in
market capitalization typically have more limited product lines, markets and
financial resources than larger companies, and may trade less frequently
and in more limited volume; real estate risk: real estate securities are
susceptible to the many risks associated with the direct ownership of real
estate, such as declines in property values and increases in property taxes;
stock market risk: stock markets have periods of rising prices and periods
of falling prices, including sharp declines; and variable current income
risk: the income which the Fund pays to investors is not stable. See the
prospectus for a complete description of the principal risks.

Davis Funds is committed to communicating with our investment partners
as candidly as possible because we believe our investors benefit from
understanding our investment philosophy and approach. Our views
and opinions include “forward-looking statements” which may or may
not be accurate over the long term. Forward-looking statements may
be identified by words like “believe,” “expect,” “anticipate,” or similar
expressions. You should not place undue reliance on forward-looking
statements, which are current as of the date of this report. We disclaim
any obligation to update or alter any forward-looking statements, whether
as a result of new information, future events, or otherwise. While we
believe we have a reasonable basis for our appraisals and we have confidence
in our opinions, actual results may differ materially from those
we anticipate.

Owner Earnings are the excess cash a business generates after
reinvesting enough to maintain current capacity and competitive
advantages but before investing for growth.

Davis Funds has adopted a Portfolio Holdings Disclosure policy that
governs the release of non-public portfolio holding information.
This policy is described in the Statement of Additional Information.
Holding percentages are subject to change. Click here or call
800-279-0279 for the most current public portfolio holdings information.

Turnover Rate is a measure of the trading activity in a mutual fund’s
investment portfolio that reflects how often securities are bought and sold.

We gather our index data from a combination of reputable sources,
including, but not limited to, Thomson Financial, Lipper and index websites.

The Wilshire U.S. Real Estate Securities Index is a broad measure of
the performance of publicly traded real estate securities, such as Real
Estate Investment Trusts (REITs) and Real Estate Operating Companies
(REOCs). The index is capitalization-weighted. The beginning date was
1/1/78, and the index is rebalanced monthly and returns are calculated
on a buy and hold basis. Investments cannot be made directly in an index.

Broker-dealers and other financial intermediaries may charge Davis Advisors
and/or Davis Distributors, LLC substantial fees for selling its funds and
providing continuing support to clients and shareholders. For example,
broker-dealers and other financial intermediaries may charge: sales
commissions; distribution and service fees; and record-keeping fees. In
addition, payments or reimbursements may be requested for: marketing
support; placement on a list of offered products; access to sales
meetings, sales representatives and management representatives; and
participation in conferences or seminars, sales or training programs for
invited registered representatives and other employees, client and investor
events, and other dealer-sponsored events. Financial advisors should not
consider Davis Advisors’ and/or Davis Distributors, LLC’s payment(s) to
a financial intermediary as a basis for recommending the Fund.

After 10/31/19, this material must be accompanied by a supplement
containing performance data for the most recent quarter end.

Shares of the Davis Funds are not deposits or obligations of any bank,
are not guaranteed by any bank, are not insured by the FDIC or any
other agency, and involve investment risks, including possible loss of
the principal amount invested.